Korea/Asia, Events, IPOs, Douglas Research Advisory

Douglas Kim

Korea/Asia, Events, IPOs

Equity Bottom-Up

<ul>
<li>In this insight, we discuss a pair trade of Nongshim Holdings (072710 KS) (go long) and Nongshim Co Ltd (004370 KS) (go short).  </li>
<li>We believe the price gap between these two stocks have widened too much in the past six months and this gap is likely to decrease again.</li>
<li>Nongshim Holdings' stake in Youlchon Chem has been rising rapidly in the past six months which should also act as a positive catalyst on Nongshim Holdings. </li>
</ul>


In this insight, we discuss a pair trade of Nongshim Holdings (072710 KS) (go long) and Nongshim Co Ltd (004370 KS) (go short).  
We believe the price gap between these two stocks have widened too much in the past six months and this gap is likely to decrease again.
Nongshim Holdings' stake in Youlchon Chem has been rising rapidly in the past six months which should also act as a positive catalyst on Nongshim Holdings. 


A Pair Trade Between Nongshim Co & Nongshim Holdings (Youlchon Chem Is Breaking Out)

Korea / Special Situations, Clepsydra Capital

Sanghyun Park

Korea / Special Situations

Korea / Special Sits, Pairs, Index Rebalancing

Clepsydra Capital

Investigate special situations, pairs, and index rebalancing trades in Korea.

Event-Driven

<ul>
<li>WISE Secondary Cell rebalances every quarter in January, April, July, and October. The effective date for the upcoming rebalancing is April 15.</li>
<li>The flow impact/price correlation of small/mid-caps is shown to be at a meaningful level. Therefore, we may need to design long/short basket trading setups focusing on these small/mid-caps.</li>
<li>The following five stocks are expected to have a significant level of flow impact at this point: SKC, Soulbrain, Youlchon Chemical, Posco Chemical, and LG Energy Solution.</li>
</ul>


WISE Secondary Cell rebalances every quarter in January, April, July, and October. The effective date for the upcoming rebalancing is April 15.
The flow impact/price correlation of small/mid-caps is shown to be at a meaningful level. Therefore, we may need to design long/short basket trading setups focusing on these small/mid-caps.
The following five stocks are expected to have a significant level of flow impact at this point: SKC, Soulbrain, Youlchon Chemical, Posco Chemical, and LG Energy Solution.


WISE Secondary Cell (TIGER ETF) Rebalancing Preview

<p>The rebalancing trading of the TIGER WISE Secondary Cell ETF, one of the local rechargeable battery ETFs, is scheduled for <strong>October 14th</strong>.</p><p>This ETF rebalances every quarter. It has a total of 26 constituent stocks, with an AUM of ₩734.4B as of last Friday's closing price. The index weight is determined based on the float-adjusted market cap, and the cap is 10%.</p><table class="table table-striped">
<colgroup>
<col width="100">
<col width="100">
</colgroup>
<tbody>
<tr><td colspan="2" rowspan="1" data-sheets-value='{"1":2,"2":"Index summary"}'>Index summary</td></tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Index name"}'>Index name</td>
<td data-sheets-value='{"1":2,"2":"Wise Secondary Cell"}'><div><div>WISE Secondary Cell</div></div></td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"ETF"}'>ETF</td>
<td data-sheets-value='{"1":2,"2":"Mirae Asset TIGER Secondary Cell ETF"}' data-sheets-formula='=googlefinance(R[1]C[0], "name")'><div><div>Mirae Asset TIGER Secondary Cell ETF</div></div></td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Ticker"}'>Ticker</td>
<td data-sheets-value='{"1":2,"2":"305540"}' data-sheets-formula='="305540"'>305540</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"AUM"}'><strong>AUM</strong></td>
<td data-sheets-value='{"1":3,"3":734.36175}' data-sheets-numberformat='[null,2,"₩#,##0.0B",1]' data-sheets-formula="=R[1]C[0]*R[2]C[0]/1000000000"><strong>₩734.4B</strong></td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Price"}'>Price</td>
<td data-sheets-value='{"1":3,"3":22355}' data-sheets-numberformat='[null,4,"[$₩]#,##0",1]' data-sheets-formula='=googlefinance(R[-2]C[0], "price")'>₩22,355</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"SO"}'>SO</td>
<td data-sheets-value='{"1":3,"3":32850000}' data-sheets-numberformat='[null,2,"#,##0",1]'>32,850,000</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Number of constituents"}'>Number of constituents</td>
<td data-sheets-value='{"1":3,"3":26}' data-sheets-numberformat='{"1":2,"2":"#,##0"}'>26</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Weight type"}'><strong>Weight type</strong></td>
<td data-sheets-value='{"1":2,"2":"Float-adjusted market cap"}' data-sheets-numberformat='[null,2,"₩#,##0.0B"]'><div><div><strong>Float-adjusted market cap</strong></div></div></td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Cap"}'><strong>Cap</strong></td>
<td data-sheets-value='{"1":3,"3":0.1}' data-sheets-numberformat='[null,3,"0.00%",1]'><strong>10.00%</strong></td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Fast entry"}'>Fast entry</td>
<td data-sheets-value='{"1":2,"2":"Yes (a minimum holding period of 30 days)"}' data-sheets-numberformat='[null,2,"₩#,##0.0B"]'><div><div>Yes (a minimum holding period of 30 days)</div></div></td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Rebalancing cycle"}'>Rebalancing cycle</td>
<td data-sheets-value='{"1":2,"2":"Quarterly"}' data-sheets-numberformat='[null,2,"₩#,##0.0B"]'>Quarterly</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Rebalancing month"}'>Rebalancing month</td>
<td data-sheets-value='{"1":2,"2":"January, April, July, and October"}' data-sheets-numberformat='[null,2,"₩#,##0.0B"]'><div><div>January, April, July, and October</div></div></td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Announcement date"}'>Announcement date</td>
<td data-sheets-value='{"1":2,"2":"Only ETF operator is notified"}' data-sheets-numberformat='[null,2,"₩#,##0.0B"]'><div><div>Only ETF operator is notified</div></div></td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Implementation date"}'>Implementation date</td>
<td data-sheets-value='{"1":2,"2":"The trading day following the option expiration dates"}' data-sheets-numberformat='[null,2,"₩#,##0.0B"]'><div><div>The trading day following the option expiration dates</div></div></td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Next implementation date"}'><strong>Next implementation date</strong></td>
<td data-sheets-value='{"1":2,"2":"October 15, 2021"}' data-sheets-numberformat='[null,2,"₩#,##0.0B"]'><div><div><strong>October 15, 2021</strong></div></div></td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Rebalancing trading"}'><strong>Rebalancing trading</strong></td>
<td data-sheets-value='{"1":2,"2":"At the close on October 14, 2021"}' data-sheets-numberformat='[null,2,"₩#,##0.0B"]'><div><div><strong>At the close on October 14, 2021</strong></div></div></td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Screening base date"}'>Screening base date</td>
<td data-sheets-value='{"1":2,"2":"The last trading day of the month preceding the date of regular rebalancing"}' data-sheets-numberformat='[null,2,"₩#,##0.0B"]'><div><div>The last trading day of the month preceding the date of regular rebalancing</div></div></td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Screening period"}'>Screening period</td>
<td data-sheets-value='{"1":2,"2":"The three months preceding the screening base date"}' data-sheets-numberformat='[null,2,"₩#,##0.0B"]'><div><div>The three months preceding the screening base date</div></div></td>
</tr>
<tr><td colspan="2" rowspan="1" data-sheets-value='{"1":2,"2":"Source: KRX &amp; TIGER ETF"}' data-sheets-numberformat='[null,2,"₩#,##0.0B"]' data-sheets-formula="=PDF!R[9]C[0]">Source: KRX &amp; TIGER ETF</td></tr>
</tbody>
</table><p>This index selects stocks with sales of ₩200B or more or 50% or more of total sales related to rechargeable batteries based on keyword analysis on local brokerage reports and company quarterly/annual reports published on DART.</p><p><strong>Therefore, the flexibility of changing constituent stocks is much lower than that of the Samsung KODEX Secondary Battery Industry ETF that uses the scoring system.</strong></p><p><strong>In addition, as no rechargeable battery stocks have been newly listed for the past three months, there will be no stock changes in this rebalancing. Only index weight will change. </strong></p><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/230/919/original/1.png?1632173660" class="editor-image img-responsive" data-smartkarma-image-id="230919"></figure></section>

The rebalancing trading of the TIGER WISE Secondary Cell ETF, one of the local rechargeable battery ETFs, is scheduled for October 14th.This ETF rebalances every quarter. It has a total of 26 constituent stocks, with an AUM of ₩734.4B as of last Friday's closing price. The index weight is determined based on the float-adjusted market cap, and the cap is 10%.





Index summary

Index name
WISE Secondary Cell


ETF
Mirae Asset TIGER Secondary Cell ETF


Ticker
305540


AUM
₩734.4B


Price
₩22,355


SO
32,850,000


Number of constituents
26


Weight type
Float-adjusted market cap


Cap
10.00%


Fast entry
Yes (a minimum holding period of 30 days)


Rebalancing cycle
Quarterly


Rebalancing month
January, April, July, and October


Announcement date
Only ETF operator is notified


Implementation date
The trading day following the option expiration dates


Next implementation date
October 15, 2021


Rebalancing trading
At the close on October 14, 2021


Screening base date
The last trading day of the month preceding the date of regular rebalancing


Screening period
The three months preceding the screening base date

Source: KRX &amp; TIGER ETF

This index selects stocks with sales of ₩200B or more or 50% or more of total sales related to rechargeable batteries based on keyword analysis on local brokerage reports and company quarterly/annual reports published on DART.Therefore, the flexibility of changing constituent stocks is much lower than that of the Samsung KODEX Secondary Battery Industry ETF that uses the scoring system.In addition, as no rechargeable battery stocks have been newly listed for the past three months, there will be no stock changes in this rebalancing. Only index weight will change. 

TIGER WISE Secondary Cell Rebalancing Preview (October 14)

Korea Event-Driven and Corporate Governance, DewPoint Research

Yeaseul Lim

Korea Event-Driven and Corporate Governance

Independent Equity Research Provider - South Korea

DewPoint Research

At DewPoint, we aim to convey a clear understanding of a company’s approach to capital allocation. As a matter of corporate governance, capital allocation reflects whose interests a company prioritizes when making management decisions. Given the Korean context, it comes down to a question of whether the company undermines the interests of minority shareholders for private benefits of controlling shareholders. This is what we focus on as a fundamental starting point in our research.
 
Capital allocation principles and practices provide the foundation for a company’s sustainable value creation. Thus, investors need to be alert to any possible distortions in capital allocation, especially when they take a long-term perspective. They also want to find safe stocks with committed management, no separation between ownership and control, and robust business models. We seek to fulfill such needs in a disciplined manner.
 
We also work as a representative of foreign investors who are willing to exercise active ownership in their investee companies. Our service may include identifying stocks that are fundamentally strong but vulnerable to activist attacks.

<p>Last January, <a href="https://www.smartkarma.com/entities/soulbrain-co-ltd" target="_blank" data-smartkarma-citation="entities:16883:1" rel="noopener">Soulbrain (036830 KS)</a> announced to split the company into a holding company and an operating company. The shareholders' meeting for the approval will be held on May 12, 2020. </p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/119/514/original/Soulbrain_structure%282%29.png?1582550900" class="editor-image img-responsive" data-smartkarma-image-id="119514"></figure>
<div class="content-caption">Soulbrain's Ownership Structure After the Split</div>
<p><a href="https://www.smartkarma.com/entities/soulbrain-co-ltd" target="_blank" data-smartkarma-citation="entities:16883:1" rel="noopener">Soulbrain (036830 KS)</a> is a manufacturer of semiconductor- and display-related chemicals. The company has shown robust operating performances over the years. Soulbrain is also capable of producing hydrogen fluoride, a liquid used by semiconductor makers to imprint silicon wafers. This explains why the company has garnered more attention especially after Japan announced to restrict exports of three chemicals (including hydrogen fluoride) to South Korea. </p>
<div class="content-highlight">
<p><strong>Investors must wonder what would happen to the company's profitable, growing businesses after the split. To sum up, there would be both gains and losses. </strong></p>
<p><strong>Without the split, there would be a risk of cash flows generated by Soulbrain being used to finance the CEO's M&amp;A ambitions. After the split, the opco will be free from such risks. However, the opco would lose a steady stream of income because dividend-paying, profitable subsidiaries now belong to the holdco. This appears unconvincing given that those subsidiaries are vertically integrated with the opco. </strong></p>
<p><strong>After all, the best scenario should be that <a href="https://www.smartkarma.com/entities/soulbrain-co-ltd" target="_blank" data-smartkarma-citation="entities:16883:1" rel="noopener">Soulbrain (036830 KS)</a> remains unsplit and the CEO focuses only on the company's core business. Neither the opco nor the holdco would be attractive enough to satisfy existing shareholders.</strong></p>
</div>
<ul>
<li>Since 2015, <a href="https://www.smartkarma.com/entities/soulbrain-co-ltd" target="_blank" data-smartkarma-citation="entities:16883:1" rel="noopener">Soulbrain (036830 KS)</a> has invested a total of 160 billion won in healthcare, cosmetics, and financial services. What makes it worse is that those M&amp;A deals have recorded a great loss. After the split, the holdco will be in charge of managing those acquired companies.</li>
<li>Under the holdco structure, the opco is not allowed to participate in a capital increase of the holdco, thereby creating a cross-shareholding. The opco is not allowed to make investments jointly with the holdco, either. Such that, after the demerger, there will be little risk that the holdco relies on the opco's strong cash flows to finance the holdco's M&amp;A activities. Given that, the opco may look safer to investors compared to <a href="https://www.smartkarma.com/entities/soulbrain-co-ltd" target="_blank" data-smartkarma-citation="entities:16883:1" rel="noopener">Soulbrain (036830 KS)</a>.</li>
<li>However, there is a key problem. Many subsidiaries that are vertically integrated with the opco are distributed to the holdco. In particular, we need to pay attention to an unconsolidated subsidiary called MS Solution. This company has generated stable cash flows and paid out substantial amounts of dividends (9 billion won) every year. Almost all of its revenue comes from internal transactions with Soulbrain. However, this subsidiary now belongs to the holdco.  It seems obvious that it will provide funds required for future acquisitions.</li>
<li>The company split may be deemed positive in that the opco would be able to keep its operating cash flows intact. It is very likely that the CEO's M&amp;A ambitions grow bigger in the future. It is more worrying because he seems to be interested in fields where he has no expertise. Investors attracted to Soulbrain's core business might be relieved that the holdco would incur such risks. However, the opco's earnings would decline due to unreasonable distribution of subsidiaries. </li>
</ul>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/119/517/original/Soulbrain_structure.png?1582551598" class="editor-image img-responsive" data-smartkarma-image-id="119517"></figure>
<div class="content-caption">Distribution of Subsidiaries</div>

Last January, Soulbrain (036830 KS) announced to split the company into a holding company and an operating company. The shareholders' meeting for the approval will be held on May 12, 2020. 

Soulbrain's Ownership Structure After the Split
Soulbrain (036830 KS) is a manufacturer of semiconductor- and display-related chemicals. The company has shown robust operating performances over the years. Soulbrain is also capable of producing hydrogen fluoride, a liquid used by semiconductor makers to imprint silicon wafers. This explains why the company has garnered more attention especially after Japan announced to restrict exports of three chemicals (including hydrogen fluoride) to South Korea. 

Investors must wonder what would happen to the company's profitable, growing businesses after the split. To sum up, there would be both gains and losses. 
Without the split, there would be a risk of cash flows generated by Soulbrain being used to finance the CEO's M&amp;A ambitions. After the split, the opco will be free from such risks. However, the opco would lose a steady stream of income because dividend-paying, profitable subsidiaries now belong to the holdco. This appears unconvincing given that those subsidiaries are vertically integrated with the opco. 
After all, the best scenario should be that Soulbrain (036830 KS) remains unsplit and the CEO focuses only on the company's core business. Neither the opco nor the holdco would be attractive enough to satisfy existing shareholders.


Since 2015, Soulbrain (036830 KS) has invested a total of 160 billion won in healthcare, cosmetics, and financial services. What makes it worse is that those M&amp;A deals have recorded a great loss. After the split, the holdco will be in charge of managing those acquired companies.
Under the holdco structure, the opco is not allowed to participate in a capital increase of the holdco, thereby creating a cross-shareholding. The opco is not allowed to make investments jointly with the holdco, either. Such that, after the demerger, there will be little risk that the holdco relies on the opco's strong cash flows to finance the holdco's M&amp;A activities. Given that, the opco may look safer to investors compared to Soulbrain (036830 KS).
However, there is a key problem. Many subsidiaries that are vertically integrated with the opco are distributed to the holdco. In particular, we need to pay attention to an unconsolidated subsidiary called MS Solution. This company has generated stable cash flows and paid out substantial amounts of dividends (9 billion won) every year. Almost all of its revenue comes from internal transactions with Soulbrain. However, this subsidiary now belongs to the holdco.  It seems obvious that it will provide funds required for future acquisitions.
The company split may be deemed positive in that the opco would be able to keep its operating cash flows intact. It is very likely that the CEO's M&amp;A ambitions grow bigger in the future. It is more worrying because he seems to be interested in fields where he has no expertise. Investors attracted to Soulbrain's core business might be relieved that the holdco would incur such risks. However, the opco's earnings would decline due to unreasonable distribution of subsidiaries. 


Distribution of Subsidiaries

Soulbrain's Demerger & Distribution of Subsidiaries: The Loss Is Bigger Than The Gain

<p>Shinheung SEC is an interesting small cap company in Korea that produces electric vehicles (EV) battery parts. Despite its small size, we believe this IPO will attract a lot of attention, given the company's excellent financials, strong growth potential, and extra premium on rechargeable battery parts makers due to the global surge in EVs. </p><p>Established in 1979, Shinheung SEC started its business producing various mobile phones and TV components. Starting 2009, the company started to actively invest in the cap assembly field, which is the safety device of lithium-ion batteries for EVs. Currently, the company has five manufacturing facilities (including three overseas subsidiaries including in China and Malaysia) to produce cylindrical/prismatic rechargeable battery parts such as cylindrical/prismatic metal cap assemblies and cans used in EVs, energy storage systems (ESS), mobile phones, and power tools. The company's major customers include <a href="https://www.smartkarma.com/entities/503" target="_blank" data-smartkarma-citation="entities:503:1">Samsung SDI Co Ltd (006400 KS)</a>, <a href="https://www.smartkarma.com/entities/20692" target="_blank" data-smartkarma-citation="entities:20692:1">Sang A Frontec Co Ltd (089980 KS)</a>, and <a href="https://www.smartkarma.com/entities/504" target="_blank" data-smartkarma-citation="entities:504:1">Hanwha Techwin Co Ltd (012450 KS)</a>.</p><p>The company has the number one domestic market share in the small and mid-sized cap assembly components. Its major Korean competitors include <a href="https://www.smartkarma.com/entities/20692" target="_blank" data-smartkarma-citation="entities:20692:1">Sang A Frontec Co Ltd (089980 KS)</a>, <a href="https://www.smartkarma.com/entities/12872" target="_blank" data-smartkarma-citation="entities:12872:1">Sangsin Energy Display Preci (091580 KS)</a>, K-Won Electronics, and Tae Hwa Industries. Going forward, the company plans to expand into the battery pack modules for the EVs and renewable energy storage systems. </p>

Shinheung SEC is an interesting small cap company in Korea that produces electric vehicles (EV) battery parts. Despite its small size, we believe this IPO will attract a lot of attention, given the company's excellent financials, strong growth potential, and extra premium on rechargeable battery parts makers due to the global surge in EVs. Established in 1979, Shinheung SEC started its business producing various mobile phones and TV components. Starting 2009, the company started to actively invest in the cap assembly field, which is the safety device of lithium-ion batteries for EVs. Currently, the company has five manufacturing facilities (including three overseas subsidiaries including in China and Malaysia) to produce cylindrical/prismatic rechargeable battery parts such as cylindrical/prismatic metal cap assemblies and cans used in EVs, energy storage systems (ESS), mobile phones, and power tools. The company's major customers include Samsung SDI Co Ltd (006400 KS), Sang A Frontec Co Ltd (089980 KS), and Hanwha Techwin Co Ltd (012450 KS).The company has the number one domestic market share in the small and mid-sized cap assembly components. Its major Korean competitors include Sang A Frontec Co Ltd (089980 KS), Sangsin Energy Display Preci (091580 KS), K-Won Electronics, and Tae Hwa Industries. Going forward, the company plans to expand into the battery pack modules for the EVs and renewable energy storage systems. 

Shinheung SEC IPO Preview (Part 1) - Rechargeable Battery Components Producer

South Korea

Youlchon Chemical Co., Ltd. develops and manufactures packaging materials such as single and multilayer oriented polypropylene films and corrugated cardboards for use in consumer product labeling and packaging applications.  The Company also produces laminated tubes to pack toothpaste, cosmetics, and adhesives.  In addition, Youlchon manufactures carrier tapes which carry electronic parts.

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Youlchon Chemical (008730 KS)

A Pair Trade Between Nongshim Co & Nongshim Holdings (Youlchon Chem Is Breaking Out)

In this insight, we discuss a pair trade of Nongshim Holdings (072710 KS) (go long) and Nongshim Co Ltd (004370 KS) (go short).

Douglas Kim

WISE Secondary Cell (TIGER ETF) Rebalancing Preview

This post previews the upcoming rebalancing of the WISE Secondary Cell Theme Index (TIGER ETF), whose effective date is April 15.

Sanghyun Park

TIGER WISE Secondary Cell Rebalancing Preview (October 14)

This post previews the rebalancing trading of the TIGER WISE Secondary Cell ETF, one of the local rechargeable battery ETFs, is scheduled for...

Sanghyun Park

Soulbrain's Demerger & Distribution of Subsidiaries: The Loss Is Bigger Than The Gain

Last January, Soulbrain (036830 KS) announced to split the company into a holding company and an operating company. The shareholders' meeting for...

DewPoint Research

Shinheung SEC IPO Preview (Part 1) - Rechargeable Battery Components Producer

Shinheung SEC is an interesting small cap company in Korea that produces electric vehicles (EV) battery parts. Despite its small size, we believe...

Douglas Kim

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52-week Range

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